Adverse Selection and Overturning Obamacare

Nov 29, 2016

Article By: Amy Rogers

One of the many questions looming after the election is what will happen with healthcare. Throughout the campaign, President-elect Trump promoted his plan to “repeal and replace” Obamacare. Since the election, he has acknowledged a couple of provisions that he would like to keep from the divisive law.

In his November 13 appearance on “60 Minutes,” Trump said he might like to keep the pre-existing condition provision. This provision keeps you from being denied coverage because of pre-existing health problems. If you have heart failure or kidney disease, you can’t be denied insurance because of it.

But Obamacare goes even further than this. It prevents people from being charged more for insurance because of pre-existing conditions. Trump hasn’t addressed whether he would like to keep this provision as well, so it’s simply a guess as to how he wishes to handle it.

Either way it’s a problem in the light of another reform Trump will almost certainly promote. In fact, how those with existing disease are charged for insurance becomes the critical question that must be answered.

Trump wants to scrap Obamacare’s individual mandate. He isn’t alone. The Supreme Court ruled that the mandate does not violate the constitution, but for many, it is downright un-American. In the U.S., we don’t require people to purchase things they don’t want.

But let’s leave the rightness or wrongness of the mandate alone. Take a look at its practical effect instead. The mandate serves two purposes. First, insurance encourages people to seek care earlier than if the cost was coming from their own pockets. Theoretically, this prevents disease from progressing to a point where it becomes an oversized financial burden. A healthier population is cheaper to care for.

The second purpose of the individual mandate is to offset the cost of caring for the sick. It brings healthier people into the insurance pool to distribute the cost of medical care across the entire population.

Without the mandate, many healthy (and often young) people opt out of insurance because they “don’t need it.” They wait until they are sick, and then purchase a plan. This skews the insured population to a sicker crowd. It increases the cost of insurance for those who do choose to be insured. With fewer people shouldering the cost of a sicker pool, higher premiums are inevitable. The increased premiums will then cause more people to opt out, further increasing the cost of insurance for those remaining in the system. And so on.

This situation is called adverse selection. It is the inevitable result of keeping the pre-existing condition mandate and, at the same time, eliminating the individual mandate. It can be avoided with premium hikes based on health status. But then many with pre-existing conditions will be excluded. This exclusion won’t be by policy, but by practicality. The sick won’t be able to afford the insurance they supposedly cannot be excluded from.

The adverse selection conundrum illustrates a larger concern about healthcare reform. Very few healthcare policies stand alone. It’s not a Chinese restaurant menu we can pick and choose from and expect to have good results. Instead, healthcare consists of a web of interconnected policies, each with its own ripple effect.

There is no doubt that a Republican House, Senate and President can overturn a controversial law passed by a Democratic House, Senate and President. We may be happy about that, or we may not. Either way, we must hope our lawmakers and President will move slowly and provide a cohesive solution that will work for everyone. A January 21 slash and burn of Obamacare will end up hurting us all.

Amy Rogers MD is not a practicing physician and nothing written here should be taken as medical advice from either Amy or AssetBuilder. Medical decisions should be made with care in consultation with your health care provider.

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